Importance of Looking at Debt - Essay Example

Extract of sampleImportance of Looking at Debt

Pay Back Period:
Payback Period = Number of years of full recovery + remaining cashflow / total cash flow

Payback Period = 4+ 7424.6/10680.22 = 4.69 Years

Q#4:
Each cash inflow/outflow is discounted back to its PV. Then they are summed. Therefore

Where
t = the time of the cash flow
n = the total time of the project
r = the discount rate
Ct = the net cash flow (the amount of cash) at time t.
C0 = the capital outlay at the beginning of the investment time ( t = 0 )

What NPV tells
With a particular project, if Ct is a positive value, the project is in the status of cash inflow in the time of t. If Ct is a negative value, the project is in the status of cash outflow in the time of t. Appropriately risked projects with a positive NPV should be accepted. This does not necessarily mean that they should be undertaken since NPV at the cost of capital may not account for opportunity cost, i.e. comparison with other available investments. In financial theory, if there is a choice between two mutually exclusive alternatives, the one yielding the higher NPV should be selected. The following sums up the NPV's various situations.

NPV > 0 the investment would add value to the firm the project should be accepted
NPV < 0 the investment would subtract value from the firm the project should be rejected
NPV = 0 the investment would neither gain nor lose value for the firm the project could be accepted because shareholders obtain required rate of return. This project adds no monetary value. Decision should be based on other criteria, e.g. strategic positioning or other factors not explicitly included in the calculation.

The project of...
The following sums up the NPV's various situations.
NPV = 0 the investment would neither gain nor lose value for the firm the project could be accepted because shareholders obtain required rate of return. This project adds no monetary value. Decision should be based on other criteria, e.g. strategic positioning or other factors not explicitly included in the calculation.
The project of this NPV is +ve and the IRR of this project, JPE should continue with the acquisition of Campbell. The IRR being greater than the cost of capital shows that the clearly shows that the project has a higher return than its cost. Therefore it should be accepted.
There is no quick and easy way for investors to get a handle on a company's debt situation. But as a starting point, debt ratios offer a valuable method for assessing a company's fundamental health. Looked at in context and over time, debt ratios can offer valuable signals of deepening debt problems. Recognizing those situations can save investors a lot of money.
While debt ratios tell investors little about a company's growth prospects or earning performance, these ratios are vital tools for gauging balance sheet durability. If, for instance, a recession or downward cyclical phase is on the way, balance sheet strength becomes more important for investors.
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Summary

With a particular project, if Ct is a positive value, the project is in the status of cash inflow in the time of t. If Ct is a negative value, the project is in the status of cash outflow in the time of t. Appropriately risked projects with a positive NPV should be accepted…

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